No need sugarcoating it, it’s been a really bad time to hold Barrick Gold (ABX). If you need convincing, look no further than the net loss Barrick posted in its second-quarter earnings. A whopping $9 million.
If you’re aware of gold’s 40% free fall since its peak of $1,814 at the end of August 2011 — and about 15% this year from its peak of $1,295.75 on Jan. 22 — then you’re aware of the reason for Barrick’s $9 million loss and the year-over-year 9.2% drop in revenues.
This tells us that Barrick’s weak figures can’t be pinned entirely on poor management.
If nothing else, though, the ongoing precious metal debacle highlights the need for disciplined operations. Barrick Gold honestly needed a discipline lesson, and management has been doing well to learn.
Streamlining Barrick Gold is the Only Path to Profitability
One would expect the largest gold miner in the world to have some measure of stability, especially concerning earnings. But that’s not the case with ABX, which has developed a trend of on-and-off profitability.
We can attribute this to Barrick’s involvement in various investments in other areas of the precious metal business. Perhaps, ABX was looking to take its leadership into other spaces; which is admirable, but Barrick Gold ended up a jack of all trades and a master of none.
Now (finally) it appears that Barack Gold is setting its sights back on gold production.
I say that in reference to the string of divestments ABX has embarked on this year. With this initiative, Barrick Gold wants to achieve a $2 billion reduction in expenditures by 2016, which would go a long way to ensuring Barrick’s mastership of gold production. According to ABX, that reduction should generate a 10 to 15% return on invested capital.
Obviously, that would make for a huge improvement from the current 9% loss currently hurting Barrick’s profitability. When gold peaked in 2011, ABX had a return on capital of just 14.3%. So to achieve a return on capital between 10 and 15% in the current precious-metal landscape would be impressive to say the least. And it would actually position ABX stock as a gold production master.
ABX Stock Needs Less Debt to Be Attractive
Coupled with its divestments, Barrick is reducing its debt footprint (which happens to be among the highest in the industry). Barrick, Newmont Mining (NEM) and Goldcorp’s (GG) total long-term debt as of the end of 2014 is $12.6 billion, $6.4 billion and $3.4 billion, respectively.
Of the $3 billion in debt reduction Barrick is aiming for this year, ABX has cut through it by two-thirds. Granted, there’s a long way to go, but the streamlining plans should reduce costs and make it easier to continue paying on that debt.
I’ll make a bold call here: I believe it’s a good time for patient investors to get in ABX stock. As far as a theme goes, investing in ABX stock is a play on a streamlined operation.
But if at any point — perhaps after precious metals have recovered — Barrick starts playing loose, that would be the time to cash in.
Here’s why:
Looking at the net income history of Barrick Gold reveals a trend: It seems that whenever Barrick Gold is doing well, management becomes less disciplined, thus increasing operating expenses to an unsustainable level. Whenever there is an issue in the gold market or in the economy, net income quickly transforms from blue to red.
That’s just history.
We don’t know for sure if this trend will continue, which is why I said ABX stock is a buy based on the restructuring the company is embarking on. This will surely propel ABX stock back to profitability, and put plenty of smiles across Barrick Gold investors’ faces.
You should, however, take note of the aforementioned trend just in case history repeats itself.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
